Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

May 2018

05/31/2018

Back in 2015 Presidential election former National Review writer Kevin Williamson (he of the 30-second Atlantic career) wrote a piece that basically said rural American just needs to get off its collective ass and move for opportunity:

... the best thing that people trapped in poverty in these undercapitalized and dysfunctional communities could do is — move. Get the hell out of Dodge, or Eastern Kentucky, or the Bronx.

If you spend time in hardscrabble, white upstate New York, or eastern Kentucky, or my own native West Texas, and you take an honest look at the welfare dependency, the drug and alcohol addiction, the family anarchy — which is to say, the whelping of human children with all the respect and wisdom of a stray dog — you will come to an awful realization. It wasn’t Beijing. It wasn’t even Washington, as bad as Washington can be. It wasn’t immigrants from Mexico, excessive and problematic as our current immigration levels are. It wasn’t any of that.

Nothing happened to them. There wasn’t some awful disaster. There wasn’t a war or a famine or a plague or a foreign occupation. Even the economic changes of the past few decades do very little to explain the dysfunction and negligence — and the incomprehensible malice — of poor white America. So the gypsum business in Garbutt ain’t what it used to be. There is more to life in the 21st century than wallboard and cheap sentimentality about how the Man closed the factories down.

The truth about these dysfunctional, downscale communities is that they deserve to die. Economically, they are negative assets. Morally, they are indefensible. Forget all your cheap theatrical Bruce Springsteen crap. Forget your sanctimony about struggling Rust Belt factory towns and your conspiracy theories about the wily Orientals stealing our jobs. Forget your goddamned gypsum, and, if he has a problem with that, forget Ed Burke, too. The white American underclass is in thrall to a vicious, selfish culture whose main products are misery and used heroin needles. Donald Trump’s speeches make them feel good. So does OxyContin. What they need isn’t analgesics, literal or political. They need real opportunity, which means that they need real change, which means that they need U-Haul.

I'm proud to say my response to Williamson led him to block me on Twitter.

So far from providing freedom, monopoly capitalism does not even desire it. To be sure, a cardinal tenet of its economic theory is that both capital and labor should be ‘free.’ But this only means that they must be allowed to flow backward and forward from area to area and from industry to industry, wherever the highest rate of profit is to be found.

In terms of labor this means that a workman had better be ‘free’ from a home, because if he had a home he would not be sufficiently mobile. He had better be free from personal responsibilities; above all, he had better be free from children.

Conservatives are supposed to be abut the permanent things. About what ties them to family, tradition, customs, and communities. Not U-Hauls.

UCLA Chancellor Gene Block is making a huge deal out of a program UCLA and The Atlantic sponsored a "conversation" about the state of the American republic:

America is at a crossroads. Internal political strife has caused a reckoning — a rethinking of who we are and what we are about. Is the United States still the beacon of freedom and hope? Is the American Dream still alive? And, perhaps most crucial: Is the American Idea working for everyone?

The Atlantic explored the state of America and pondered its future. At the core, we asked: Who are we and who do we want to be?

They invited 14 speakers. Not one was a conservative or populist. (No. David Frum no longer counts. And hasn't for a long time.)

05/24/2018

Bankman, Joseph and Gamage, David and Goldin, Jacob and Hemel, Daniel Jacob and Shanske, Darien and Stark , Kirk J. and Ventry, Dennis J. and Viswanathan, Manoj, Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit (January 8, 2018). UCLA School of Law, Law-Econ Research Paper No. 18-02; UC Hastings Research Paper No. 264. Available at SSRN: https://ssrn.com/abstract=3098291 or http://dx.doi.org/10.2139/ssrn.3098291

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.

A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return.

In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule.

The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.

It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Delaware Chancellor Travis Laster kicked some serious plaintiff lawyer butt. Part III'm not an litigator, but it seems to me arguing that the judge made "ridiculous" and "absurd" rulings is not a way to win friends and influence the outcome.https://t.co/MinE2eK3i9pic.twitter.com/vdELa5c2BD

Delaware Chancellor Travis Laster kicked some serious plaintiff lawyer butt. Part IIIIt doesn't seem to me that accusing a judge of acting in bad faith is a bright move, especially when you litigate cases in front of the judge all the time.https://t.co/MinE2eK3i9pic.twitter.com/EQQ0DKXA7Z

Delaware Chancellor Travis Laster kicked some serious plaintiff lawyer butt. Part VI have no reason to suck up to Laster, so trust me on this one: he is a legal titan (even if he is wrong about the geography of Revlon-land).https://t.co/MinE2eK3i9pic.twitter.com/A8r1i1N9HN

Shareholder voting is dominated by institutional investors. The SEC requires institutional investors to vote on corporate proxy matters but allows them to discharge this duty by relying on the voting guidelines of third-party proxy advisory firms. Proxy advisory companies have come under increasing scrutiny and criticism in recent years. This report seeks to inform current reform efforts with a review of the best empirical evidence on these firms.

KEY FINDINGS

Proxy advisory firms lack transparency. The leading proxy advisors do not publicly disclose how they develop their voting guidelines or the results of any testing to demonstrate that their recommendations are accurate.

Institutional investors are influenced by the recommendations of proxy advisory firms. Their influence is most significant in proxy contests, the approval of company-wide equity compensation plans, and executive compensation advisory (“say on pay”) voting.

Corporations are influenced by the recommendations of proxy advisory firms. Research generally shows that proxy advisory firms’ influence on the design of company-wide equity compensation plans and say-on-pay voting is harmful to shareholders, but their recommendations for deciding proxy contests (contested director elections involving control of the corporation) are beneficial to shareholders.

Proxy advisory firm recommendations may not be in the best interest of shareholders. Proxy advisory firms have no clear fiduciary duty to act in the best interest of the shareholders of institutional investors and may be subject to conflicts of interest.

Reform might be necessary. One avenue is by adopting standards to improve proxy advisory firms’ accuracy, transparency, and accountability. Another is to eliminate the requirement that institutional investors vote all items on corporate proxy statements.

05/18/2018

Simple, or naïve, attitudinalism posits Supreme Court justices vote their policy preferences in each specific case they decide. Yet if justices indeed pursue policy outcomes in their decisions, the belief that justices vote their policy preferences in each specific case makes no sense. Justices who seek to maximize achievement of their substantive policy preferences in their judicial decisions will not necessarily vote for the substantive outcome they prefer in a particular case.

Here’s why.

In recent years the U.S. Supreme Court hears about 80 cases per term. The actual legal decision in these few cases binds only the specific parties to the dispute. While some cases are more significant than others, that’s still not necessarily a huge amount of political influence relative to the influence the precedent will have on scores, or even hundreds, of related cases that are not heard by the Supreme Court. Even thinking of actual cases ignores the policy impact Supreme Court precedents can have: Precedent influences not only actual cases, but affects behavior that never rises to the level of litigation. Competent legal counsel can advise clients in light of the precedent to behave in a way that leaves them without risk of litigation.

This broader policy impact of precedent can swamp the policy impact of resolving a legal dispute between the two litigants in a case actually before the Court.

As longtime readers may recall, Mitu Gulati and I did on this issue a while back. See Stephen M. Bainbridge & G. Mitu Gulati, How Do Judges Maximize? (The Same Way Everybody Else Does—Boundedly): Rules of Thumb in Securities Fraud Opinions, 51 Emory L.J. 83 (2002).

Our work suggests that Rogers' account of judicial incentives is incomplete because he makes two moves common to the debate over how judges decide cases. First, he focuses on the Supreme Court, despite the fact that that court decides an infinitesimally small amount of American law. In addition, he focuses on Supreme Court cases that have partisan policy implications, which make up an even smaller fraction of judicial work. In a typical Supreme Court term, "approximately 80 percent of votes are in support of the majority opinion, and only about 20 percent of cases are determined narrowly. The 5–4 cases that get national attention are in fact somewhat anomalous." A small sample of anomalous cases is not going to tell us much about how judges in general maximize. (And notice that Roger's post is titled :How Judges Maximize" not "How Supreme Court Justices maximize in the small percentage of their cases that have closely divided partisan policy implications." There is at least the suggestion that his analysis had broad application.)

Second, Rogers implicitly invokes the two basic modes of judicial decision making, which we identified as the Herculean model in which the judge has full information and full knowledge and, generally speaking, gets it right; and (b) the Wannabe model, in which the judge seeks to be Herculean, but errs because he or she is mortal. Two sub-variants of each model depend on what the scholar in question believes that judges seek to maximize: social welfare or personal policy preferences.

Gulati and I pointed out that these accounts fail to account for the fact that judges are agents with incentives to shirk in a variety of ways. We began "by assuming a nonexpert federal judge faced with an overwhelming caseload and limited time and resources with which to decide those cases. We add[ed] the assumption that most judges do not find securities law interesting. From these institutional characteristics, we infer[ed] an explanation for the development and popularity of the heuristics premised on limited cognitive capabilities, resource constraints, and a judicial desire to move cases off the docket in an acceptable fashion."

Instead of leaving [determinations of materiality and intent] for trial, as we show herein, judges are using substantive heuristics to dispose of securities cases at the motion to dismiss stage. In contrast to prior commentary, however, we argue this result reflects not a pro-defendant bias but rather institutional constraints that give judges incentives to eliminate securities cases from their dockets with minimal effort.

Second, our focus on substantive heuristics highlights a previously unobserved link between institutional constraints and the evolution of substantive doctrine. When judges invoke procedural heuristics that enable them to avoid tackling a substantive issue, there is no effect on the evolution of substantive law (except that no law is created). When judges invoke substantive heuristics, however, the use of such heuristics channels and even dominates the on-going evolutionary processes of the (quasi-common) law of securities regulation. As we demonstrate, for example, the development of substantive securities law heuristics has dramatically affected the evolution of the law on both materiality and scienter. At the same time, however, other issues, such as the scope of different duties to disclose, are largely ignored (except perhaps to say why they were not deserving of attention).

Importantly, this is true even at the Supreme Court level.

There is general agreement that the Supreme Court has not done a very good job in the securities area, especially in recent years. Scholars operating in a wide range of paradigms have criticized the court’s recent securities opinions. Supreme Court securities law decisions typically lack a broad, consistent understanding of the relevant public policy considerations. Worse yet, they frequently lack such basics as doctrinal coherence and fidelity to prior opinions.

Why doesn’t the Supreme Court do a better job in securities cases? Our model offers an answer. When deciding securities cases, the Court is faced with hard, dry, and highly technical issues. Supreme Court justices and their clerks arrive on the court with little expertise in securities law. One reasonably assumes that neither the justices nor their clerks have much interest developing substantial institutional expertise in this area after they arrive. (Former Justice Powell being the exception that proves these rules.) Accordingly, it would be surprising if the Court’s securities opinions exhibited anything remotely resembling expert craftsmanship.

Under such conditions, we would expect the justices to take securities cases rarely, typically when there is a serious circuit split, which is in fact what we observe. When obliged to take a securities issue, the Court will seek to minimize the amount of effort required to render a decision. This observation is not intended pejoratively. To the contrary, in terms of our model, the justices are acting rationally. …

Bounded rationality implies that Supreme Court justices (and their clerks) have a limited ability to master legal information, including the myriad complexities of doctrine and policy in the host of areas annually presented to the court. Specialization is a rational response to bounded rationality—the expert in a field makes the most of his limited capacity to absorb and master information by limiting the amount of information that must be processed by limiting the breadth of the field in which he develops expertise. Supreme Court justices will therefore need to specialize, just as experts in other fields must do. Specializing in securities law would not be rational. The psychic rewards of being a justice—present day celebrity and historical fame—are associated with decisions on great constitutional issues, not the minutiae of securities regulation.

The debate over judicial incentives is important. The overemphasis on 5-4 Supreme Court decisions in that debate, however, means that the vast majority of both the academic and public debate--including the colloquy between Rogers and McGinnis--grossly distorts the real picture of how (and what) judges maximize.

05/09/2018

I ran across an interesting Lewis quote on democracy, which I think is quite true:

I am a democrat because I believe in the Fall of Man. I think most people are democrats for the opposite reason. A great deal of democratic enthusiasm descends from the ideas of people like Rousseau, who believed in democracy because they thought man- kind so wise and good that everyone deserved a share in the government. The danger of defending democracy on those grounds is that they're not true. ...

The real reason for democracy is just the reverse. Mankind is so fallen that no man can be trusted with unchecked power over his fellows. Aristotle said that some people were only fit to be slaves. I do not contradict him. But I reject slavery because I see no men fit to be masters.

Note the small d in "democrat"; he's not talking about US political parties.

What can the history of satanic imagery in law and literature teach us about the development of humanity’s understanding of its relationship with evil? This wide-ranging account of Satan’s presence across textual mediums uncovers the secret genealogy of contracts with Satan, from the Gospel of Matthew to Mayo v. Satan and His Staff (1971). This ironic lineage recounts how a Christian clergyman was the first to consummate a contract with Satan, how Martin Luther was the first to link Johann Faust to Satan, and how the poet who inspired Charlie Daniel’s “The Devil Went Down to Georgia” was the first to imagine an attorney litigating against Satan. Yet, these ironies are not so significant as the moral innovations that each stage in the evolution of the diabolical contract motif represents.

Mignanelli, Nicholas, Is Satan a Transactions Attorney? An Account of Satanic Imagery in Law and Literature (April 10, 2018). University of Miami Legal Studies Research Paper No. 18-16. Available at SSRN: https://ssrn.com/abstract=3160397

Ann Lipton raises the longstanding question of whether corporations have disclosure obligations with respect to the private lives of CEOs--especially those in the celebrity subset thereof--and the related questions of whether those CEOs have fiduciary duties to their corporation about how they conduct their lives and whether boards have Caremark duties to oversee those lives.

Joan Heminway (who has written on the topic) draws a distinction between imposing disclosure obligations and imposing fiduciary duties:

Ann's post, which posits (among other things) that corporate chief executives might be required to comply with their fiduciary duties when they are acting in their capacity as private citizens, really made me think. I understand her concern. I do think it is different from the disclosure duty issues that I and others scope out in prior work. ...

... Yet, even where there is no technical conflicting interest or breach of a duty of loyalty, there is a clear business interest in having corporate managers—especially highly visible ones—act in a manner that is consistent with corporate policy or values when they are not “on the job.” While voluntary corporate policy or private regulation may have a role in policing that kind of director or officer activity (through service qualifications or employment termination triggers, e.g.), I do not think it is or should be the job of corporate law—including fiduciary duty law—to take on that monitoring and enforcement role.

Imposing fiduciary duties on CEOs with respect to how they conduct their private lives does pose really hard questions, especially in our present dystopia in which the toxic combination of social media and identity politics turn every indiscretion into world shaking crises. Yet, as the #metoo movement has reminded us, there are all too many cases in which powerful people (like celebrity CEOs) have not merely been indiscreet but have in fact committed appalling acts that call into question their judgment and have generated serious bad news for their corporations.

But where and how do you draw the line between saying a CEO has a fiduciary duty not to engage in icky consensual sex and a fiduciary duty not to act like Harvey Weinstein or Eric Schneiderman?

The same issue arises, of course, with respect to a question I find even more interesting; namely, to what extent should a board have Caremark duties to monitor a CEO's private life. Personally, I think Caremark is not limited to law compliance programs. A board presented with red flags relating to serious misconduct--especially misconduct in a sphere of life directly related to the corporation's business (think Weinstein)--has a duty to investigate. But, again, does that mean the bard should hire private investigators to track the CEO 24/7?

05/07/2018

I had the opportunity recently to meet Johannes M. Rowold, an outstanding young German scholar, during his visit at UCLA. He's working on a very interesting project and summarizes the research here:

My doctoral thesis is in the field of corporate law and supervised by Professor Christoph H. Seibt. It addresses the question what specific duties board members of German stock corporations have when a situation arises in which their company or they themselves face conflicting laws from different jurisdictions.

There are a number of cases where neither international nor domestic law offers a solution to a conflict of laws, with the result that sometimes a breach of either jurisdiction’s law is inevitable. Any natural person in this situation would decide on the basis of a cost-benefit analysis as to what law to break. However, with regard to situations in which the company faces such a conflict, under German corporate law board members owe a “duty to act lawfully” to their corporation. This means they are required not only to obey those provisions that directly pertain to themselves, but also to ensure that the company complies with all legal provisions it is exposed to, even if such compliance is economically less beneficial to the company compared with disobedience. In light of this, it is questionable how board members are required to make a decision in a situation in which a breach of law occurs in either case.

A practical example of this conundrum can be found in a jurisdictional dilemma typical of the 21st century: the broad US discovery rights and the strict European (and German) privacy laws usually collide with each other when US courts or US authorities request the transfer to them of certain data electronically stored on European servers. The addressees of those requests are threatened with sanctions from the US in the event of non-compliance. However, compliance with requests by non-member states like the US often constitutes an infringement of data protection laws in Europe, which is sanctioned by the imposition of a fine.

He also explains why he chose UCLA School of Law for his US base:

I chose UCLA School of Law for a research visit because it is a top-ranked law school in the US with a declared research focus on corporate law, which is evidenced by the high international profile of its business law centers. Furthermore, UCLA Law’s library hosts one of the most comprehensive collections of legal material in California and the US. Ultimately, UCLA Law had a specific program for visiting researchers pursuing a PhD degree at their home schools.